The Essential Guide to Economic Substance Regulation (ESR) in the UAE

Understanding Economic Substance Regulation (ESR)

Economic Substance Regulation (ESR) was introduced to ensure that companies registered in the UAE engage in substantial economic activities and align with international efforts to prevent harmful tax practices.

Key Objectives of Economic Substance Regulation (ESR)

• Prevent Tax Evasion: Ensures companies are not established solely for tax benefits.
• Promote Transparency: Aligns with global tax standards set by the OECD.
• Encourage Economic Activity: Requires businesses to contribute meaningfully to the UAE economy.

Activities Covered Under Economic Substance Regulation (ESR)

Businesses undertaking the following activities must comply with ESR:

• Banking
• Insurance
• Investment Fund Management
• Lease-Finance
• Headquarters
• Shipping
• Holding Company
• Intellectual Property
• Distribution and Service Centre

Compliance Requirements To comply with ESR, businesses must meet substance test as below:

• Conduct Core Income Generating Activities (CIGA): Key activities must be performed in the UAE.
• Maintain Adequate Staff, Assets and Premises: Adequate personnel and expenditure relevant to the business activities must be present in the UAE.
• Ensure Proper Governance: Regular board meetings and decision-making processes should occur within the UAE.

Reporting Obligations

• Annual ESR Notification: Businesses must submit a notification each year within 6months from the end of the reporting period.
• ESR Report: A detailed report demonstrating compliance with ESR must be submitted within 12months from the end of the reporting period.

Penalties for Non-Compliance

Non-compliance with ESR can result in significant fines, business license suspension, and other penalties. It's crucial for businesses to understand and meet all regulatory requirements to avoid these consequences.

Strategies for Ensuring Compliance

• Self-Assessment: Regularly assess whether your business activities fall under relevant activities as per ESR.
• Detailed Record Keeping: Maintain thorough records of economic activities and governance practices.
• Ongoing Monitoring: Continuously review and monitor compliance with ESR.
• Professional Advice: Seek guidance from experts to navigate the complexities of ESR.

How can ECAG help you with ESR?

• Conduct detailed Assessment to check whether the company conducts the relevant activity
• Provide the guidance on maintenance of documentation in line with ESR (in cases of ESR Audit)
• Support & guidance on submission of ESR Notification & ESR Reporting
• Guidance on complying with substance test & requirements
• Support & guidance on ESR Appeals & ESR Audits

Conclusion

Compliance with the UAE's Economic Substance Regulation is essential for businesses to operate legally and effectively. By understanding the requirements and implementing robust compliance strategies, companies can avoid penalties and contribute to the UAE's economic growth.